The bankruptcy judicial system reform (BJSR) constitutes a fundamental institutional pillar of a rule-of-law business environment, playing a pivotal role in accelerating industrial upgrading. Leveraging the bankruptcy court establishment (BCE) as an exogenous shock and utilizing data from Shanghai and Shenzhen A-share listed companies (2015–2023), this study employs a multi-period difference-in-differences (DID) approach to examine BJSR's impact on corporate capacity utilization rates (CCUR). Key findings reveal that BCE significantly enhances CCUR. Mechanism analysis demonstrates that BCE improves CCUR through dual agency cost governance-simultaneously reducing equity and debt agency costs. Heterogeneity tests indicate that BCE's CCUR-enhancing effect is more pronounced in regions with underdeveloped legal environments and weaker financial environments, and in firms with poorer governance environments. Structured path analysis shows that BCE's CCUR-enhancing effect is achieved through curbing excessive fixed-asset investment and alleviating intangible-asset underinvestment. Spatial spillover analysis confirms that BCE's CCUR-enhancing effect has spatial externalities. These findings suggest that improving CCUR requires fully harnessing BJSR's dual agency cost governance efficacy while synergistically advancing legal environment refinement, financial environment optimization, and governance environment enhancement.